House of Lords
Friday, 14th June 1996.
The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.
Prayers--Read by the Lord Bishop of Worcester.
Commonwealth Development Corporation Bill
Lord Chesham: My Lords, I beg to move that the Bill be now read a second time.
I take a great deal of pleasure in coming before your Lordships' House today to discuss the CDC Bill. It is a sensible and necessary measure which will enable the CDC to continue to fulfil its fundamental purpose in new ways, better adapted to present day needs in so many of the developing countries of the world and most particularly in Africa.
The CDC is well known to Members of this House. It has many friends here with personal experience of its operations overseas. To other noble Lords it is welcome as a valuable and well-respected development finance institution. Its role, established by statute, is to contribute to the economic development of poorer countries. The CDC has successfully been playing that part since 1948, and, although the developing world looks very different now, nearly 50 years on, anything that the CDC does today and in the future must still contribute to that single purpose. It is, I believe, important to be clear on this point. The CDC is the main instrument within Britain's overseas aid programme in promoting private-sector development in enhancing productive capacity, a central aim of the UK aid programme.
Perhaps I may at this point pay tribute to the excellent leadership provided by the Chairman of the CDC, the noble Earl, Lord Cairns, and by other members of the CDC. While speaking of CDC members I should like to say how sad we were to learn of the untimely death on 30th May of Ian Carruthers, Professor of Agrarian Development at Wye College. His energy, enthusiasm and clarity of vision will be greatly missed by the CDC and, indeed, by the Overseas Development Administration, with which he had a long association.
The CDC has its roots in the Commonwealth, and Commonwealth countries still remain at the heart of its operations. Nineteen of its 24 overseas offices are located in these countries, utilising the advantages of a common second language, legal and commercial systems based on UK law, education and other links. In 1995, 38 of the 50 countries in which the CDC operated were in the Commonwealth. These countries attracted 67 per cent. of the CDC's new investments and have 71 per cent. of the total portfolio.
Those strong links are directly relevant to the role which the CDC has been asked to play in the Commonwealth Private Investment Initiative, of which
I shall say more later. But, since 1969, the CDC has, with ministerial approval, gradually and appropriately expanded its activities outside the Commonwealth, focusing on new countries on the basis of development need.Looking to the future, the CDC's country coverage is not set to alter dramatically. There are, for example, no plans or intentions to divert activity into middle income countries or eastern Europe. The corporation has already ceased to make new investments in the richer countries in Asia, such as Singapore, Malaysia and Hong Kong. The CDC will continue to focus on poor countries with a development need it can fill, drawing on its traditional experience and expertise. Over the next few years the CDC is expecting to continue to increase its new investments in Africa.
The CDC brings tangible benefits to the lives of local people and its contribution is growing. Overall, in 1995 new investments were at a record high of £276 million, an increase of 15 per cent. on the previous year. The CDC has also comfortably beaten the strategic targets set in the 1993 Quinquennial Review. Ninety per cent. of board approvals for new investments were in the poorest countries, against a target of 70 per cent. Forty-seven per cent. of these--or £153 million--were in sub-Saharan Africa. Forty-seven per cent. of approvals were in the form of equity, or quasi equity, against the target of 25 per cent. Against the target of 8 per cent. return on capital employed the corporation actually achieved 9 per cent. in 1995.
Sectorally, the CDC expects to give increasing importance to private infrastructure projects, important to wider development goals such as telecommunications and power, industrial materials, manufacturing and financial markets. The priority areas for its new managed businesses are forestry, rubber, aquaculture, arable crops, sugar production and processing, power generation and cement. Many of those businesses will build on the CDC's traditional strength in the agriculture sector and will add value to its investments for the benefit of host countries. By such means as these, the CDC will continue to be responsive to the changing needs in developing countries and will match its new projects to those needs.
The CDC recycles returns on its capital investments into new businesses. Just last month it announced the sale of the BAL Plantation in East Malaysia for about £100 million equivalent. That provides a good example of selling mature investments to local interests to raise funds for reinvestment in other development projects world-wide. As this House well knows, however, the CDC is not in business to make a quick or easy profit. It is not a passive investor. CDC is there to add value to enterprises, usually by providing longer term finance than is available on the commercial markets; by improving the design and structuring of investment proposals; by contributing management expertise; and by moderating risk in countries which normally attract only a small proportion of private flows. Between 1992 and 1994 the CDC invested 50 per cent. of its investments in sub-Saharan Africa and South Asia, compared with only 2 and 4 per cent. respectively of total private sector flows going to those regions.
The CDC's activities have an important catalytic effect. In 1995 a total of £1.7 billion was committed alongside CDC's commitments in developing countries to produce a ratio of 1:6 of CDC's funds to those of other investors. By supporting commercially viable and developmentally sound businesses, CDC promotes growth which adds to the economic development of poor countries.
Against that background of success we might ask why CDC needs the new powers contained in the Bill we are considering today. Your Lordships will recall the Private Member's Bill introduced last year by my noble friend Lord Trefgarne. It contained proposals essentially the same as those in the Bill today: to remove constraints on CDC which prevent its more active participation in sustainable development overseas. Those proposals met with support in this House, but regrettably, failed to make progress in another place. I am pleased to say they have now come back with its full support.
These new powers are particularly relevant to enable the CDC to be fully involved in the Commonwealth Private Investment Initiative, which I mentioned earlier and in which it has agreed to take a leading role as fund manager. The CPII was warmly endorsed by Commonwealth Heads of Government meeting in Auckland last year. The initiative has the potential to benefit poorer Commonwealth countries by generating and using investment funds provided by other member states.
It is expected that the first phase of the initiative--the Commonwealth Africa Investment Fund--will be launched in July and should be ready to start investing at the time of the Commonwealth Finance Ministers meeting later this year. The fund will focus on sub-Saharan Africa, with an initial capital target of 75 million dollars, of which the corporation will provide 25 million dollars. As the initiative gains momentum, the CDC intends to bring in other institutional investors from the major financial centres of the world, thus mobilising long-term private sector funds not otherwise available to sub-Saharan Africa. The fund is attracting an excellent response from governments and government agencies in South East Asia and Southern Africa. Prominent representatives from the international business and financial sectors have agreed to serve as independent directors.
But, to play its full part and to make the maximum use of its unique experience and network of offices in Africa, the CDC must have powers to assist with rehabilitation and restructuring. These, together with finance for the start-up and expansion of businesses in a wide range of sectors, will be the focus of the fund's activities. At present CDC is empowered to promote or expand new or existing enterprises, but it must have the same powers as its co-investors if the long-term development of this important Commonwealth initiative is not to be put in jeopardy.
I have explained that at present the CDC is empowered to promote or expand new or existing enterprises. This means, of course, that CDC funds are
applied primarily to creating new or additional assets or capacity. This is, and will remain, central to the CDC's work, but it undoubtedly significantly limits the corporation in assisting host governments and major businesses which wish to divest themselves of enterprises, where change of ownership is a necessary preliminary step to regeneration. In many cases, it is the change of ownership and consequential changes of management which are vital to transforming the enterprise for the benefit of the economy. More and more governments in the developing world are seeking help in regenerating under-performing businesses, whose future they perceive would be more successful in the private sector.In the past, the CDC has been unable to participate in a number of worthwhile enterprises in Southern Africa because they would involve reorganisation rather than immediate expansion. Clause 1 of the Bill addresses this need and would allow the CDC to play its full part in the development process.
The constraints imposed on the CDC by the existing legislation also hinder it in assisting in the development of effective money and capital markets in developing countries. The development of these markets is essential if business is to have access to finance and savers are to have ready access to investment opportunities. They are important for the efficient allocation of funds into productive investments and to promote economic growth. The CDC is able to set up and manage investment funds to assist small and medium sized enterprises. It has been doing this increasingly in Africa, but it is unable, for example, to invest in country or sector funds part of whose portfolio is in quoted securities, although such funds and their management encourage the development of capital markets and the formation of stock or securities exchanges or dealings mechanisms.
The powers contained in this Bill would enable the CDC to carry out these activities and to be placed in a position similar to that of the International Finance Corporation and other development institutions. There is no inconsistency here between giving the CDC the ability to promote successful funds which will attract private capital and its traditional activities. Both are necessary if the CDC is to continue with its "hands on" approach to investment, which, as we have seen, brings real benefit to poor countries.
The third change proposed in Clause 1 of this Bill relates to consultancies not linked to the provision of finance or management services by the CDC--referred to as "dry" consultancies. There are occasions when the corporation is asked to provide such services in areas where it has specialist expertise arising from its core activities. At present, it has to refuse unless the consultancy forms part of a project in which the CDC already has an interest or is expected to participate. We see no reason to maintain that restriction. The CDC will not normally compete for contracts with the private sector; nor does it intend to develop an extensive consultancy capacity. Rather it will use its specialist skills for the benefit of others on a full cost recovery basis.
The CDC works closely with its sponsor department, the Overseas Development Administration, to ensure that all its activities contribute to the UK's development objectives. Key operational targets were set in the context of the 1993 Quinquennial Review and I have illustrated the ways in which the CDC is most successfully achieving them. Its performance is regularly monitored and reviewed. The CDC will remain a public sector body, operating within the strategic framework of controls agreed with Ministers. The CDC's board is fully committed to its fundamental purpose and will continue on that path. We should, however, recognise that change can be beneficial and is sometimes necessary to ensure future success.
We should empower the CDC to extend and adapt its activities carefully and logically in response to the changing needs of poor countries, which will remain the focus of its investments.
The Bill will assist the CDC to continue its fine work, which I know commands support among all parties. It enjoyed a swift unopposed passage in another place. I hope that it will receive enthusiastic support here. I commend the Bill to the House.
Moved, That the Bill be now read a second time.--(Lord Chesham.)
11.21 a.m.
Lord Judd: My Lords, I thank the Minister for his explanation of the purposes of the Bill. At the outset, I should like to associate this side of the House fully with what the noble Lord said about Professor Ian Carruthers. He will be sorely missed and leave a gap which it will be difficult to fill.
Let us at least start today by being positive. We welcome any opportunity to discuss the CDC because it enables us, once again, to put on record our appreciation of its largely very practical and constructive contribution to overseas development. It enables us to celebrate the dedicated service of those who have so effectively worked for it in the field and the loyal back-up by their colleagues in London.
Its hands-on, practical, front-line work has usually been outstanding, bringing expertise and management skills, to which the Minister referred, to build up the real, tangible economy--the wealth generating, job creating dimensions--of the countries in which it operates. That tradition of nitty-gritty engagement is the backbone of the enviable reputation won by the CDC over many years and it is one on which we should all help and encourage the CDC to build. The tradition must never--I repeat, never--become sidelined by the attractions of armchair financial wizardry. Its role must not be seduced into becoming just another merchant bank.
However, having said that, we all recognise the vital part to be played by private investment in development. The imaginative new Commonwealth Private Investment Initiative--and I fully endorse everything that the Minister said--is a timely illustration of this. If the CDC can help to bring investment funds to countries, programmes and projects where such funds would otherwise be lacking, that is something to be
firmly encouraged; as, indeed, is appropriate assistance in the general development of the private sector and financial services when and if that is genuinely additional.What worries us is the apparent confusion between the CDC and the ODA. That was well illustrated by the introduction of two Bills in quick succession last year. First, there was the Government's own Bill which, if the policy had been properly considered together with the CDC, should surely have covered all the essential points. But, no sooner had that Bill been passed than we were confronted by the Private Member's Bill--the Commonwealth Development Corporation (No. 2) Bill--originating in this House and sponsored by the noble Lord, Lord Trefgarne, on which we were frantically lobbied by the CDC, which told us that it was absolutely essential--I emphasise the word "essential"--to the future of the corporation, a view to which the Government lent their full support. With the greatest possible respect to all concerned, that was, frankly, extraordinary. How could an essential element have just been overlooked in the preparation of the Government's own Bill? We have never had a convincing answer. The saga continues, inevitably, to breed considerable anxiety about just how firm or clear-headed the stewardship of this distinguished corporation really is--a stewardship which depends upon the best possible working relationship between the ODA and the CDC. The anxiety is accentuated when, with genuine respect for the noble Lord with whom I personally greatly enjoy dealing across the Floor of the House, the Minister herself is not here to handle her own Bill. How far, we must ask ourselves, has the noble Baroness really focused on those important matters?
I know that the noble Baroness gets restless when I call for a comprehensive, strategic statement of the Government's overseas development policy as a whole--ideally, a White Paper. She cannot conceal her irritation that we are not prepared to make do with the fundamental expenditure review, her senior management review, her NGO review, her annual reports, her Chatham House speeches and the rest. But this Bill is another very good example. We have a lot of tails wagging or, too often, drooping in the sphere of overseas development; what we and the public cannot discern is the dog--if, indeed, in terms of strategic and comprehensive policy, the dog is there at all. The CDC is undoubtedly an indispensable instrument, but to measure its effectiveness, and what most needs to be done to maintain and enhance that effectiveness, we need to see how it fits into the strategy as a whole--just as we similarly need to see with the non-governmental organisations and other significant elements of the aid programme.
In the event, last year, after a great deal of probing in this House and the other place, not everyone in the other place was sufficiently convinced, and the Commonwealth Development Corporation (No. 2) Bill fell. Now we have another Bill--this time sponsored by the Government--which very much reflects its ill fated predecessor. Let me repeat: the fact that the Government
themselves are introducing it again as an essential measure underlines all the anxieties. How on earth did they forget this essential in the first place?The Bill has been well debated in the other place. The noble Lord will have read the debate; indeed, in fairness, he has today dealt with some of the issues then raised in his characteristically full and courteous way. But some issues remain central and I should like to put them again to the noble Lord so that he has an opportunity to deal with them fully in his response.
First, are the indications, to which I referred, of a breakdown in the close relationship between the ODA and the CDC, indicative of failing government commitment? Is not the absence of the Minister herself today significant? How central does the CDC remain to the Government's overseas development strategy as a whole--always supposing that there is such a strategy? Will the CDC really remain in the public sector? I noted what the Minister said about the importance of being ready for change when change is necessary. Alternatively, is it being abandoned by default, if not by positive conviction, to the private sector? We look to the noble Lord to give categorical answers to those questions.
Secondly, we have been told that the powers in the Bill are required to enable the CDC to play a full part in the Commonwealth Private Investment Initiative--something that we all want to see; indeed, we understand that the CDC only sought new powers in relation to its role in this Commonwealth initiative. Why then do we now have a Bill before the House which provides for new powers for the CDC in all its operations? What specific operations beyond a part in the Commonwealth initiative do the Government intend to facilitate?
Thirdly, in that context, in addition to specifying exactly what operations the new powers in the Bill are intended to make possible, can the noble Lord enlighten us on how extensively it is envisaged that those powers will be used? Last February, the office of my honourable friend in the other place, Joan Lestor, was officially informed that:
- "CDC might well set its own internal limits on the proportion of its investments to be in accordance with the proposed new powers".
There is a great difference between specific, ad hoc powers and open-ended powers. This difference relates to the fears that CDC may be on the road to turning itself into a merchant bank juicily ripe for takeover by one of the institutions of the kind of which a number of its board members have so much experience. What is the Government's position? Can the noble Lord leave us in no doubt about this? Currently, the CDC has to apply to the Government for a licence to operate in non-commonwealth countries. Could not a similar process be adopted with regard to the new powers? We still have not heard how the Government and the CDC will ensure that the benefits of the Bill are concentrated on those in greatest need and are not increasingly
diverted just to where the returns are greater. Effectiveness in meeting greatest need must surely be the guiding principle.Fourthly, of course we recognise CDC's desire to improve private investment flows into Africa--we applaud it--and we very much sympathise with the frustrations under existing Treasury constraints; but, even if the new powers in this Bill could help in CDC's continued search to find the finance for new projects, there will still be a huge gap between possibilities and funds. Can the noble Lord tell us whether this Bill is the end of the legislative road or whether we are likely to see another CDC Bill in the near future to extend the powers of CDC to borrow on the private market? Have discussions perhaps already taken place with this in mind?
Fifthly, given that new CDC investment is largely funded from old and existing projects, does the noble Lord agree that there is a case for ensuring that a healthy balance is struck between reinvestment in those countries with an existing relationship with CDC and any new partners? Does he not also agree that it would be unfair to syphon off surpluses from countries which have generated them into countries where the need is not so desperate? How will the Government ensure that this does not happen?
Sixthly, in previous deliberations CDC has stressed that, because it spearheads investment in countries which other investment organisations ignore, it has no natural competitors. This Bill rather changes all that. What do the Government think will be the likely impact on the way CDC operates, reflected in the skills of its staff and the way it determines its market focus?
With too many aid programmes across the world--not least our own--faltering and declining, there is a temptation these days to talk up private investment flows. Private investment is never a substitute for sound and generous aid programmes designed to bring people into the real economy, and the noble Lord, I know, would not want to suggest otherwise. But private investment flows obviously have a dynamic and critically important part to play in sustained development. However, we all have to face the reality--as the Minister has perhaps indicated--that they do not flow to the poor countries of South Asia or sub-Saharan Africa. They go largely to a group of middle income countries in East Asia and Latin America. In 1994, 90 per cent. of private investment went to just 10 developing countries. Private flows to sub-Saharan Africa are minute and the World Bank has recorded that from 1992 to 1994 only 1 per cent. of private capital flows went to the most indebted countries. By contrast, and to its considerable credit, the CDC informs me that--I quote from a letter of 11th June last--
- "CDC's portfolio is now heavily skewed towards poorer and therefore the most high risk investment environments. In broad terms, using a per capita income of less than 1,400 dollars in 1994 prices as the definition of a poorer country, 70 per cent. of our investments and commitments are in countries that do not pass that threshold, as compared with 38 per cent. for the IFC and around 50 per cent. for other European DFIs. Small economies (of total GNP of less than 25 billion dollars) account for 59 per cent. of our portfolio as compared with 16 per cent. for IFC".
If there remains a doubt that the CDC, with the powers proposed in this Bill, could drift away from a development focused operation to a more orthodox investment bank approach, one way to put minds more at rest would be to increase the number of board members with a strong development background. Why do the Government not do that? At present the board is, frankly, overloaded with bankers. Some have said it is chock-a-block with bankers.
The noble Earl, Lord Cairns, the chair of CDC, has written to my honourable friend in the other place, Joan Lestor, taking her to task--perhaps just a little indignantly--for referring to the CDC as wanting to churn its assets. He insists that all CDC is seeking to do is to maximise the development input of inevitably limited resources. He argues that this may well involve actively seeking to disinvest where the development impact has been completed. We welcome this reassurance. We hope the noble Lord can give convincing answers to the questions I have raised today. For our part we shall then not just acquiesce in the Bill but give it our positive support.
11.36 a.m.
Lord Redesdale: My Lords, I support this Bill for a second time. I do not believe there is a great deal of difference between this Bill and the Bill which the noble Lord, Lord Trefgarne, brought forward in the previous Session. However, the wording is slightly different.
I am glad that the Government have found parliamentary time to bring forward this Bill again as it is an important Bill. I hope that it will pass through all its stages. I was quite surprised that the Private Member's Bill of the noble Lord, Lord Trefgarne, which received so much support on a previous occasion, should have failed in the Commons. However, I understand that there was a degree of apprehension that the ugly word "privatisation"--the noble Lord, Lord Judd, has a view on that--had raised its head. Perhaps the Minister can give us an open and plain assurance that it is the Government's intention that the CDC should remain totally in the public sector. I think that would put all our minds at rest.
I believe that the CDC's success and strength rely on the fact that it is part of the public sector and is so closely associated with the Overseas Development Administration. The activities of the CDC were coherently described by the Minister. Therefore I need not cover them again. However, I wish to pick up a point that he made; namely, that one of the underlying factors of the Commonwealth Development Corporation is its role in private investment. On that issue I have a divergence of opinion with the noble Lord, Lord Judd.
I believe that private investment is vital for successful emerging economies. I believe that it is a vital component of that success. Aid should be the first step but private investment is far more important for a country to be successful.
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